China buying oil from Iran — paying with RMB

China is buying crude oil from Iran using its currency the yuan, an Iranian diplomat has said…

The Financial Times cited unidentified industry executives in Beijing as saying most of the oil that goes from Iran to China is handled by the Unipec trading arm of Sinopec China’s second-largest oil company, and through another trading company called Zhuhai Zhenrong.

Fayyaz also confirmed that Iran was spending the currency on goods and services imported from China…

The trade is worth as much as $20bn-$30bn annually according to industry estimates, but a share of it is in barter form. Zhuhai Zhenrong, for example, pays Iran for its oil by providing services such as drilling, these people add.

“The global financial crisis accelerated the shift from the west to the east,” said the chief executive of one bank in Dubai. “Such measures [as the U.S. sanctions against Iran] will now enhance the acceptability of the renminbi as a transaction currency…”

The renminbi purchases began some months ago. Initially the non-barter portion of the transactions were settled in Beijing through renminbi accounts but now, as a result of U.S. pressure, domestic banks such as Bank of China have stopped dealing with Iran, the oil executives and bankers said.

Instead, much of the money is transferred to Tehran through Russian banks, which take large commissions on the transactions…

Beijing has been trying to get its trading partners to use the renminbi, in effect transferring the exchange rate risk to its counterparties, since the price of crude is set in U.S. dollars. It also frees Beijing of the need to hold as many dollars in its reserves.

This caught my eye because I have always felt that part of the Bush/Cheney reasoning behind the invasion of Iraq was Saddam Hussein’s decision to walk away from the PetroDollar.

The American dollar has been the dominant currency for oil trades for decades. Only the gradual political split away from the dominance of Western banks and Anglo-American corporations offered an opportunity for countries selling their raw materials to settle accounts in a currency other than the dollar. In Iraq’s case – they decided on the Euro. We know what followed.

China’s RMB is well on the way to becoming an international currency and it strikes me as some sort of convoluted but appropriate response that Obama’s continued dedication to Israel’s policies in Palestine, obedient application of sanctions on Iran – are laying the groundwork for speeding up the process of acceptance of the yuan.